Homeowners are Becoming Unintentional Landlords

By: Craig Berry Reviewed By: Paul Centopani
June 13, 2023 - 4 min read

A new phenomenon in the housing market

The current cocktail of increased demand and limited supply has made affordability out-of-reach for many would-be home buyers. When you add higher mortgage rates to the mix, you get a trifecta of challenges.

Then, if you look to the “other side of the market”, you’ll notice something that’s making an already sluggish housing market even slower. Many would-be sellers who locked in low rates before or during the pandemic are holding off on their plans to sell, some choosing instead to become landlords.

Continue reading to learn more about how existing homeowners are becoming unintentional landlords.

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The Catch-22 for millennials and other homeowners

The pandemic brought on record-low rates for those looking to buy their first home, and those wanting to upgrade or refinance. From 2017 to 2022, millennial homeownership skyrocketed. The generation added seven million new homeowners over the last five years.

Millennial homeowners, Sam and Kayla, bought a home in May of 2021. After adding a new baby and a four-legged family member to their household, they need a bigger place.

Like many people who bought in 2020 and 2021, Sam and Kayla were able to lock in a low fixed rate of just 3.25% when they purchased their home. As much as they want and need a new home, that would mean having to give up a great rate in the low 3’s for one likely double that.

Higher home prices combined with higher mortgage rates means their new home would cost them roughly $1,400 a month more than they’re currently paying. According to Kayla, “It sickens me when I think about paying inflated home prices, not to mention giving up such a great rate for one that’s nearly double.”

Instead of selling their property and losing their rate, Sam and Kayla have decided to rent out their current home. This is becoming more and more common for many U.S. homeowners.

Mortgage rates then and now

Sam and Kayla are among good company with their sub-four percent rate. As of March 31, roughly two-thirds of primary mortgages had an interest rate below 4%, according to Black Knight.

As of June 1, the 30-year fixed-rate mortgage averaged 6.79%, according to Freddie Mac. It’s not surprising that homeowners are reluctant to give up their current rates when you compare the average rate of 2.99% in June 2021.

The difference in your monthly payment if you locked in a rate then vs now on the same loan amount is eye opening:

DateLoan amount30-year FRMPayment (P&I)
June 3, 2021$350,0002.99%$1,470
June 1, 2023$350,0006.79%$2,266

Assuming a loan amount of $350,000 would mean a payment nearly $800 more per month based on today’s rates than what you would’ve paid just two years ago.

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These golden-handcuffs of mortgage rates are perpetuating an already low supply of homes for sale, and driving up demand along with home prices. The result is many homeowners deciding to keep their existing homes under low rates and turn into landlords.

Move-up buyers and first-time buyers impacted most

The rapid rise in interest rates has forced homeowners who were entertaining a possible move to reconsider. This means fewer homes are coming on the market and causing what some economists have called a stalemate.

Generally, there are three groups of homebuyers.

  1. First-time homebuyers
  2. Move-up homebuyers
  3. Luxury homebuyers.

Move-up buyers, like Sam and Kayla, are the ones being most affected by these golden-handcuffs.

With current homeowners staying put, “the movement up the ladder is sort of grinding to a halt,” according to Freddie Mac Chief Economist Sam Khater. As move-up buyers stop moving up, “it’s getting much harder for first-time buyers to jump into the market because of the lack of supply.”

Whether it’s current homeowners who were planning to sell their existing homes for a house with more space or elderly homeowners looking to downsize, many Americans have put their plans on hold. This has resulted in many homeowners staying in houses that aren’t necessarily an ideal fit for them.

Your current home — a castle or prison?

Another interesting rising dilemma that makes today’s housing market different from most is that many homeowners feel trapped.

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Typically, homeowners make a decision to sell their home, adding supply to the market. This is done independently from buyer influence. In today’s market, however, the existing homeowner is often both the seller and the buyer facing an unusual challenge.

In order to buy a new home, their current home must be sold. But, with low inventory and higher mortgage rates, finding a “better” house than you currently have is much more challenging.

If other homeowners aren’t selling, there’s an added risk of selling your current home and not being able to find another home. Or, at least not finding another home that suits your needs and fits your price point.

The trade-off: record-breaking equity

While some homeowners are choosing to become landlords, others are taking advantage of record-breaking home equity.

Halfway through 2022, the average U.S. homeowner sat on roughly $300,000 in home equity, more than ever before. As a result, some homeowners are choosing to sell their home, and then offset high home prices and high mortgage rates by using the equity from the sale of their home towards their new home.

This works for some, but not everybody. Sam and Kayla gained approximately $100,000 in equity in just two years. However, using all their equity has them feeling like they’d be giving up their low rate without gaining much of a benefit. According to Kayla, “Having to apply all of the equity we gained in two years towards a new home just so we can afford it seems like a waste.”

The bottom line

Many Americans are opting to rent out their current homes instead of selling them because they don’t want — or can’t afford — to give up their low mortgage rates. Choosing not to sell has put an even greater strain on an already thin inventory of homes for sale.

“Inventory will remain tight in the coming months and even for the next couple of years,” said Lawrence Yun, the National Association of Realtors (NAR) chief economist. “Some homeowners are unwilling to trade up or trade down after locking in historically-low mortgage rates in recent years.”

So, what sits on the horizon? No one knows for sure, but NAR predicted existing home sales to drop annually by about 7% in 2023 before bouncing back by 10% in 2024.

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Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.
Paul Centopani
Reviewed By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.